SEC mulls further measures against naked short sales amid criticism from lawmakers

Exclusive reporting for FinReg21 by Darrell Delamaide

The SEC once again tackled naked short selling issues as a panel of experts at its “roundtable” on short selling looked at a possible requirement to pre-borrow shares before selling them short, a procedure also known as “hard-locate.”

While short sellers are currently required to borrow the shares or have a reasonable assurance that they will be able to borrow them, the proposal would make it mandatory to actually know what shares will be borrowed.

Naked short selling is when someone sells a share without owning or borrowing it. It has been blamed for price manipulation and even driving some vulnerable startups out of business.

But the SEC panel drew fire from two lawmakers who said, “It is clear that the panel is stacked against the need for restrictions on naked short selling.”

Sens. Ted Kaufman (D-Del.) and Johnny Isakson (R-Ga.), who are spearheading legislative efforts to rein in short selling, made the charge while insisting that the focus should be on giving the SEC’s enforcement division “the tools to end naked short selling once and for all.”

The two lawmakers have also criticized the SEC for taking so long to restore the uptick rule, which prohibits short sales unless the price has risen and which prevents short sellers from ruthlessly beating down a share price.

The experts on the naked short selling panel in fact did come only from the banks, exchange platforms and asset managers who opposed any further requirements on short selling.

They argued that previous SEC efforts, including the recently finalized rule that requires short sellers to close out any failures to deliver within four days, have been effective in dramatically reducing the fails.

Most remaining fails are related to exchange-traded funds because of technical difficulties due to their structure or companies that no longer are operational. These experts argue that a new pre-borrow rule is not necessary and would disrupt normal, legitimate short sales.

Critics of the panel drew attention to the absence of academics or consumer advocates to present the case for a pre-borrow requirement. It may be the SEC, which normally tries to make sure that all sides are heard in these roundtables, had trouble finding anyone to make the case.

In any event, the agency has also invited written comment from the public on the issue, so that anyone who wants to argue in favor of a pre-borrow rule can do so.

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Monday 20 September 2010 | wasaserious was...

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